NOVEMBER 1, 1999

Morgan Grenfell buys into FOH

MORGAN GRENFELL PRIVATE EQUITY, a subsidiary of Germany's vast Deutsche Bank, has agreed to pay Bernie Ecclestone $325m for a 12.5% share in SLEC Holding, the parent company of Formula One Holdings, the company which controls the commercial exploitation of Formula 1 racing. MGPE has also signed an option to buy another 37.5% of the company for $975m and is currently looking for venture capital money to complete the deal. If everything goes to plan Bernie Ecclestone will walk away with $1.3bn - and will still retain 50% of the company.

If the deal is confirmed - and it is subject to regulatory approval from the European Commission, but not conditional on the outcome of the current investigation on the way the sport is run (an important but subtle difference) - FOH is expected to have a new board of directors which will be chaired by former Mercedes-Benz chairman Helmut Werner. Ecclestone has long had Werner in mind as the chairman of the company and he is known to the top managers of Deutsche Bank, as the bank has long been the largest shareholder in the Daimler-Benz empire, Mercedes-Benz's parent company. MGPE will be represented on the board by Scott Lanphere and Robert Fowler III.

The deal has been negotiated by Lanphere - who first became involved in F1 in January when MGPE bought a 40% shareholding in the Arrows team. The company still owns those shares but there is likely to be pressure to sell if the FOH deal goes ahead - to avoid a clash of interest.

"Formula 1 is the world's leading sporting brand name," said Lanphere. "It attracts more viewers than any other annually held sporting event and almost all of its revenues are contracted, which makes its earnings the highest quality of any business I know."

MGPE has adopted a high profile in recent months with 46 investments totalling $9bn. These include the purchase of the Piaggio motor scooter company, the Coral bookmaking company and Vianova, a company which specializes in industrial resins. MGPE is backed by the financial might of Deutsche Bank, which has global assets of $875bn.

Ecclestone and MGPE have agreed to a strategy for the business which is to continue to aim for an initial public offering in two or three years time - depending on market conditions.

MGPE says that there is considerable interest from venture capital firms in becoming involved in the project and rumors in Italy have linked the deal to 21 Investimenti, the venture capital company of the Benetton Family. There are plenty of other similar firms.

"From an investment point of view we feel very confident about the upside of the business," said MGPE chief executive Graham Hutton. "It is a largely under-exploited sport in terms of what can be done to take it further, particularly in the Far East and with plans for an F1 event in the US."

MGPE is also understood to be interested in exploiting the potential of the sport in terms of pay-per-view Internet entertainment. At the moment FOH is generating something in the region of $400m a year, of which $200m is profit. The rest of the money is paid out to the Formula 1 teams. Ecclestone has already borrowed $1.4bn against the future revenues of the company - in the form of a Eurobond issued by another German bank West LB. This organization acted as advisor in the MGPE deal. The majority of the Eurobonds are still believed to be held by West LB, although there have been rumors in recent weeks that McLaren owners Ron Dennis and Mansour Ojjeh have been looking at buying them. We also hear that Dennis and Ojjeh were involved in a rival bid for FOH. There was, we understand, also a third bidder.

When FOH is eventually floated the F1 teams are expected to be given a 10% shareholding in the company, with the FIA receiving a similar amount of equity.

The inclusion of Fowler on the board is interesting. He is currently chief executive of the @ Entertainment cable TV company, which has been breaking ground in Poland with its fiber-optic cable technology and digital satellite broadcasting - both areas in which Ecclestone is looking to expand the F1 business. Fiber-optic technology will soon mean that FOH no longer needs to transport its vast TV facility from race to race and we believe that ultimately Ecclestone will build a permanent TV facility at his Biggin Hill headquarters in Kent. This will enable FOH to become involved in the production of TV programming for other sports with the potential of vast earnings as big sporting organizations compete to use the technology.